Trial of a former banker and economy minister gives hope to Spanish ‘mortgage victims.’
MADRID — On a January morning outside a government building in central Madrid, a group of campaigners from the Platform for Mortgage Victims (PAH) gathers to hand a document to the authorities, calling on them to ensure that banks pay back in full money to those who have suffered financial abuses.
Among them is Caridad Lomas, a frail-looking woman of 70.
She and her husband were the guarantors of their daughter and son-in-law’s mortgage. But when the latter lost his job, he and his family could no longer keep up mortgage payments and were evicted. The bank is still demanding money from them because of the property’s loss in value since its purchase.
Lomas blames the eviction in great part on a condition contained in the mortgage known as a cláusula suelo, or “floor clause,” meaning the interest the family had to pay never went below a certain level, even when market rates plummeted.
“The floor clause has cost us a lot of money,” Lomas says. “We’ve paid more than we should.”
There are only a few dozen activists gathered outside the government delegation building, but Lomas’s case is by no means unusual. Many of the others here have similar stories and an estimated three million Spaniards are believed to have signed floor-clause mortgages.
After decades during which banks were seen as trustworthy pillars of society, they are now facing a costly and painful backlash. The recent economic crisis saw public opinion turn against Spain’s lenders. And now, ordinary customers are finally receiving compensation for abuses while bankers are starting to feel the force of the law for their allegedly corrupt practices.
On December 21, the European Court of Justice delivered a key ruling regarding Spain’s banking practices. It acknowledged the right of homeowners affected by floor clauses to be reimbursed money dating back to when their mortgage contract was signed. Previously, they were only entitled to reimbursement as far back as May 2013, when the Spanish Supreme Court first ruled that such clauses were unlawful.
Estimates vary as to how much lenders will have to pay back clients as a result of the ruling, but financial consultancy AFI has put the figure at approximately €4.5 billion and it affects many of the country’s biggest banks, such as BBVA, Banco Popular and Banco Sabadell.
The conservative government of Mariano Rajoy has called on customers and the financial industry to carry out the reimbursement swiftly through negotiation. Bankia, Spain’s fourth-largest bank, has obeyed, announcing on January 30 a fast-track payback scheme, for which it has provisioned €200 million. Other lenders could follow.
But beyond the now-notorious floor clauses, a litany of other cases of financial abuse and mismanagement had already eroded Spaniards’ faith in their financial sector.
Bankia’s former chairman, Rodrigo Rato, was investigated for allegedly misleading the authorities over the bank’s accounts in the lead-up to its disastrous 2011 stock exchange listing and he is waiting to find out if he will be tried. Last year, Bankia agreed to pay back €1.5 billion to 200,000 small investors who lost money in the listing.
In a separate case, Rato has been on trial for his role in a system of credit cards that were handed out to executives of Bankia and its predecessor, Caja Madrid. The cards were used for personal expenses — in Rato’s own case for buying shoes, alcohol and other similar items — yet were apparently not registered on the books of the bank, which required a €22 billion state bailout in 2012. A former IMF managing director who was economy minister between 1996 and 2004, Rato is credited with overseeing the property-driven economic boom that preceded Spain’s financial crisis. A verdict for him and 64 other defendants is expected soon.
“Even if you’re a lawyer you don’t really understand what it means” — Francisco Romero, lawyer
The so-called “black credit card” case saw €15.5 million in the banks’ funds being spent — a relatively small sum in the bigger picture. But another scandal, that of so-called preferential shares, had a much bigger impact on the pocket of ordinary Spaniards.
The shares were a complex and ultimately poor-performing financial product that many banks aggressively sold to long-time customers, often without explaining how they worked. Several million people invested in them through different banks and many ended up losing their life savings. A Supreme Court ruling in March of 2016 admonished banks for not informing clients sufficiently about the product.
As with the floor clauses, customers often bought into such investments without fully understanding what they were signing.
“When you read this kind of clauses, they are quite complex to read, even if you’re a lawyer you don’t really understand what it means,” says Francisco Romero, of law firm Arriaga Asociados, which specializes in claims by customers against banks.
“So imagine a lay person, they don’t really understand what they’re reading,” he adds. “That’s why the banks are in an abusive position in this sense, and they can impose any clause.”
Founded in the middle of Spain’s financial crisis, Arriaga Asociados started with four lawyers. With demand for its services soaring, it now has 450 of them. Since the European Court of Justice ruling in December, the company has received thousands of calls from mortgage holders who wish to claim their money back through the courts, rather than negotiate with their bank.
Spain’s strict mortgage laws have compounded the tensions between many customers and their lenders. With the eurozone crisis sending unemployment soaring as high as 27 percent, hundreds of thousands of those who had bought property during the boom were unable to meet their monthly mortgage payments. Foreclosures became a daily occurrence and continue now, since the country’s return to economic growth — over 29,000 families were evicted from their homes in 2015, according to the Bank of Spain.
Another European Court of Justice ruling, in January, chided the lack of protection for Spaniards in the mortgage market.
Reacting to that decision, Economy Minister Luis de Guindos pledged more transparency. “The problem is the clauses which aren’t clear,” he said. “The abusive ones are the murky clauses and we have to stop the murkiness.”
Such controversy is a far cry from the days when Spain’s banks enjoyed a huge degree of respectability.
Throughout the 20th century, millions of working Spaniards trusted their money with cajas, or regional savings banks. Highly regulated, they restricted their low-risk activities mainly to their own geographical area. But after the transition from dictatorship to democracy in the late 1970s, they became increasingly deregulated, expanding their investments beyond the confines of their region. At the same time, politicians and union leaders started to sit on their boards, turning many of them into political instruments, or hotbeds of nepotism.
In January, the national Audit Court estimated that the banking crisis had cost the country €61 billion.
“Soon, many regional presidents and mayors ended up controlling the credit policy of the banks operating in their political territory and behaving like pharaohs,” wrote Mariano Guindal in his account of Spain’s economic crisis, Los días que vivimos peligrosamente (“Our days of living dangerously”).
As the property boom picked up in the mid-1990s, this phenomenon increased, at times to an absurd degree. Caja Castilla La Mancha (CCM) helped finance costly white elephants such as Ciudad Real airport, which now sits empty on the plains of La Mancha, before requiring a bailout in 2009. The board of Valencia’s Caja de Ahorros del Mediterráneo (CAM), which was bailed out in 2011, included a dance teacher and a supermarket check-out employee.
Much has changed over the last five years. Spain’s bloated financial sector has been reformed and streamlined, cleaning up balance sheets and stabilizing the industry to great effect. But the boom-and-bust years still cast a long shadow. In January, the national Audit Court estimated that the banking crisis had cost the country €61 billion.
Despite recent developments, the president of Spain’s Banking Association (AEB), José María Roldán, remains bullish.
“No, I don’t think [Spaniards] feel betrayed by the banks,” he told POLITICO. “We have a problem right now in terms of the impact on our reputation, which we need to rebuild going forward, but no, we don’t think that this is the case.”
“The mortgage market in Spain works very well,” he added. “If you look at international comparisons, the home ownership ratio is higher in Spain than in other countries and the interest Spaniards have paid over the last 10 or 15 years has been lower than in some other markets.”
A civic group called 15MpaRato has been deeply involved in uncovering many of the cases of banking abuse. Starting in the depths of Spain’s financial crisis, in 2012, a handful of Barcelona-based activists, aided by a large online network, have been combing through publicly available documents and identifying financial irregularities.
“If one of the consequences of this massive fraud is to stop people from trusting their banker, then that’s to be welcomed” — Sergio Salgado, founding member of 15MpaRato
“If [the banks] were able to do this, it was because nobody was watching them,” said Sergio Salgado, one of their founding members. “Perhaps people believed that there were institutions that would do that, that the stock exchange supervisor, or the Bank of Spain, all those institutions would be watching and that if a banker offered you such-and-such a financial product, it couldn’t be fraudulent.”
Surprisingly, perhaps, Salgado believes there is an upside to the breakdown of trust.
“A bank is not your friend,” he said. “A bank shouldn’t give you financial advice. So if one of the consequences of this massive fraud is to stop people from trusting their banker, then that’s to be welcomed.”
But 15MpaRato remains dissatisfied that the bankers responsible have not been going to jail. That also looks like it is about to change.
On January 16, five senior executives of the former Novacaixagalicia bank were jailed on two–year sentences, for enriching themselves while bankrupting the lender.
El Confidencial newspaper described it as “a historic moment for Spain: the first case of people responsible for the collapse and appropriation — the plundering — of the money of savings banks going to prison after being convicted.”
Rato’s credit card trial, currently coming to its conclusion, will be watched even more closely. Acutely aware of the former minister’s status as a symbol of the excesses of an era, one defense lawyer has warned that the accused in the case must not be used as the scapegoats for Spain’s entire banking crisis.
However, Rato’s imprisonment would be a stunning message that Spain’s years of impunity have ended. By contrast, his acquittal, or a soft sentence, would cause many Spaniards to conclude that little has changed after all.